Question 1 (See Examples 2&3 in Chapter 10)
Tony contributes land with a basis and value of $180,000 in exchange for a 40% interest in the calendar year of XYZ, LLC, which is treated as a partnership. In 2015, the LLC generates $600,000 of ordinary taxable income. Because LLC needs capital for expansion and debt reduction, it makes no cash distributions during 2015.
1. How much is Tony taxed on for 2015?
2. Would the result be the same if LLC reported a loss for 2015?
3. What is Tony's outside basis in the LLC's interest and what is the LLC's inside basis in the land?
4. Tony reports his 240,000 share of the LLC income. What is Tony's outside basis amount now?
Question 2 (See Example 24 in Chapter 2)
In 2015, Selvi, Corp. has gross income (including dividends) of $400,000 and business deductions of $600,000 excluding the dividends received deduction. Selvi, Corp. had received $200,000 of dividends from Office Inc., in which Selvi, Corp. holds a 5% stock interest. Please compute Selvi, Corp.'s taxable income or loss.
Selvi, Corp.'s NOL is carried back two years to 2013. Assume that Selvi, Corp. has taxable income of $80,000 in 2013, please compute the taxable income for 2013 with the NOL carryover amount to 2014.
Question 3 (See Examples in Chapter 10)
For 20 years, Anne has owned and operated a riverside restaurant called The Riverside. Anne rents the property from Landlord Bob. Business was booming and Anne is on her way to becoming a billionaire. Anne decides to expand her business and asks Bob if he would help her with her business, and Bob agrees. They approach John who is a real estate developer and he proposed an expansion to The Riverside and upgrades to the building.
Anne, Bob and John agree to form a partnership to own and operate The Riverside. Anne and Bob will each contribute one-half of the capital. Bob will contribute the real estate at a value of $3 million. Anne will contribute the equipment and the restaurant furnishings at a value of $1 million and the cost of improvement, which amounts to $2 million. John will oversee the construction and when complete, he will vest in a 5 percent interest in the partnership's capital. On an ongoing basis, John will oversee the partnership's operations in exchange for a fixed salary and 20 percent of the partnership's ongoing profits. The construction is estimated to be completed in June of 2016, and his capital interest is estimated to be valued at $400,000 at that time.
What are the tax consequences if the trio forms The Riverside as a partnership to own and operate the restaurant. Please limit your answers to the portions covered in class only.